Saturday, April 22, 2006

Brian Gaynor: More than one choice for GPG

Tony Gibbs' high-profile stance against the new investment tax proposals has been uncompromising and out of character.

Guinness Peat Group's New Zealand director usually plays his cards close to his chest and gives the impression that he has a number of alternative strategies. But during the past two weeks Gibbs has loudly declared that GPG has only one option: the company will leave New Zealand if it isn't granted an exemption under the new investment tax regime.

His high-profile stance has had a negative impact on GPG's share price and has annoyed many shareholders, particularly those who participated in the recent placement of 51 million shares at $2.60 each.

If Gibbs were true to form he would have stated that he was deeply disappointed with the new tax proposals but GPG had several alternatives and would choose the one that was in the best interest of shareholders. This would give him plenty of time to lobby Government ministers, in public and private. It would also calm investors' nerves.

Gibbs' main case is that GPG should be classed as a New Zealand company because most of its shareholders and directors are New Zealanders. This has never been the basis for determining a company's residency.

Guinness Peat is a UK company that first came under New Zealand influence in March 1987 when Allan Hawkins' Equiticorp acquired a 26 per cent stake. Five months later, Hawkins made a bid for the entire London-based group and ended up with just over 50 per cent.

When Equiticorp was placed under statutory management in January 1989, the GPG stake was transferred to a syndicate of international banks. Hawkins later wrote: "I now think the Guinness Peat investment was the single biggest factor in our later downfall."

In February 1990, Brierley Investments (BIL) made a takeover offer for GPG and ended up with a 63 per cent holding, including the shares held by the international banks. BIL acquired a further 20 per cent from Sir Robert Maxwell's Pergamon Holdings in May 1991.

A month later, BIL sold 140 million shares or 43 per cent of the company at 45c a share (BIL sold its remaining 40 per cent at a later date). The 1991 share sale was allocated as follows: 100 million to NZX brokers for distribution to institutional investors and private clients in New Zealand, 30 million to select brokers in Australia and 10 million to chairman Sir Ron Brierley.

GPG was an ideal fit for New Zealand investors because it was based in a grey list country, where New Zealand investors do not pay a capital gains tax and had more than £90 million of UK tax losses. It also had Sir Ron Brierley at the helm.

GPG listed on the NZX on June 28, 1991. The NZX was its primary exchange as the group had been delisted from the London Stock Exchange at the end of 1990.

Although the NZX became GPG's home exchange it was granted a large number of waivers from the listing rules, including:

* The requirement to have at least two directors resident in New Zealand.

* The requirement to have its secretary resident in New Zealand.

* The requirement for its offering memorandum to comply with clauses of New Zealand's Securities Regulations 1983.

Since 1991, GPG has been able to pick and choose the best of two worlds. It is UK-registered, has had substantial UK tax losses and holds all its annual meetings in London, while the majority of its shareholders are capital gains tax-exempt New Zealanders.

GPG's performance has been phenomenal since the 45c-a-share placement in 1991. Its investment performance has been outstanding and directors have enriched returns by a continuous stream of 1-for-10 bonus issues.

GPG took another important step in 2002 when it merged with UK Brunel Holdings. The catalyst for the merger was the diminution of GPG's original £90 million of tax losses and the large losses available to Brunel.

The merger was effected by Brunel making a takeover offer for GPG on a 1:1 scrip basis and changing its name to GPG after the successful bid. The merged company is more than 98 per cent-owned by original GPG shareholders and has major tax losses.

The proposed investment tax regime will not extinguish these UK tax losses but it will mean that New Zealanders with more than $50,000 of offshore shareholdings at cost will be subject to a capital gains tax (CGT) on non-Australasian shares from April 1 next. It also means that New Zealand-orientated pooled funds (unit trusts) will have to pay an unrealised CGT on their GPG holdings whereas there will be no CGT on New Zealand-resident companies.

Although Gibbs has painted a bleak outlook if GPG doesn't get a CGT exemption, the company has several options. These alternatives, which are summarised in the accompanying table, have to be looked at from a shareholder and corporate tax perspective.

1 The preferred option for GPG and its New Zealand shareholders would be for the Government to classify the company as a New Zealand resident.

This would allow GPG to maintain its UK tax losses, and individual investors and pooled funds would be exempt from a CGT under the new regime.

This is an unlikely outcome because GPG and Brunel were established in the UK in 1919 and 1909 respectively and an exemption would also give GPG an unfair future advantage over all other New Zealand companies.

2 If the Government doesn't grant the exemption, the company could remain in the UK and individual and pooled funds here would be subject to a CGT. This would be the worst outcome for New Zealand shareholders.

3 Individuals and pooled funds would not be subject to the proposed CGT if GPG moves its head office, but not its subsidiaries, to New Zealand. The company could lose its corporate UK tax losses under this scenario but these have probably diminished in importance because GPG has fewer share trading profits and most of its subsidiaries pay their own tax. As New Zealand's proposed investment tax regime only applies to shareholdings under 10 per cent outside Australasia, and GPG has less than 1 per cent of its assets in this category, its corporate tax impost in New Zealand could be fairly minimal.

4 A move to Australia would also exempt all New Zealand shareholders from the proposed CGT. The company's tax position in Australia is more complicated, but the group's tax management expertise could be utilised to minimise the impact of any Australian corporate tax.

Although Gibbs is making a huge song and dance about the new investment tax proposals, it may be a blessing in disguise for GPG shareholders. The group is subject to limited scrutiny, particularly at annual meetings, because most of its shareholders are on the other side of the world. This is an important issue as its directors are ageing and there is no obvious succession plan.

Moving its corporate headquarters to Australasia would remove the threat of a CGT for either individual or pooled funds in New Zealand and allow shareholders to monitor the company more closely. It could also boost GPG's share price because there are a huge number of investment funds in Australia looking for top-class companies to invest in.

Disclosure of interest: Brian Gaynor is a GPG shareholder and an investment strategist and analyst at Milford Asset Management.